Great blog posts about macroeconomics

Pension Reform and why we need it

A California district court ruled on Tuesday to dismiss a lawsuit brought against the city of San Diego by the state’s Public Employees Relations Board. This decision marks a major victory for pension reform efforts in California. Pension reform happens almost entirely at the state and local level, so it receives little coverage in the national news cycle, but it mounts a growing threat to the solvency of state governments as well as
the well-being of government retirees. So what is pension reform, and why is it one of the most threatening issues facing our nation?

The United States’ pension crisis is rooted in powerful public-sector unions. These unions advocate on behalf of government employees for higher pay and more benefits. Because state and local governments face budgetary constraints (that is, they are typically unable to run a fiscal deficit), they cannot hand out large pay raises to employees, so the majority of union bargaining results in greater retirement benefits. Increased pension benefits are easy for governments to pass as the costs of increasing benefits occur at a point in the future when the present governments will have long been replaced (and notably, its operators will be themselves retired). The state of California spent $32 billion on employee pay and benefits in 2011, up 65% over the previous decade, while cutting spending on higher education by 5% over the same period. Most state pension systems have a funding ratio of less than 80%, meaning that generally around 20% of annual pension liabilities are not covered by state or employee contributions, and these liabilities are passed on to the next year’s fiscal budget. In this way the cost of mismanaged pension systems continues to snowball as governments pass the buck from year to year. Current budgetary employees will likely face a huge burden of retiree benefits, as governments come under increasingly intense pressure to cut pay and benefits to employees. Resulting effects can include higher taxes, starvation of other government initiatives, and potentially government default on its obligations to retirees.

One proposed solution is to switch to a 401(k) type plan, in which employees would decide how much to contribute to a personal fund for their own retirement. This would both incentivize employees to contribute more toward their own retirement, as well as enabling employees to decide how much they want to risk on the possibility of government defaulting on its obligations.

Certainly a solution must be reached if we are to avoid a future of mounting debts, broken promises, and government default.